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Near-term patchy on slow private capex!

Siemens (SIEM) in its FY24 annual report emphasized its strategy to capitalize on the opportunity potential that exists in India from diverse sectors and industries, spurred by favorable government policies, a relatively sanguine macroeconomic situation, and the ongoing global energy transition while also acknowledging the transient hiccups in select segments. Nevertheless, underscoring its intent to participate in India’s long-term growth potential, SIEM in FY24 announced the expansion of its GIS, vacuum interrupter, power transformer, and metro train manufacturing facilities for a cumulative outlay of INR10b. We believe that a selective approach for HVDC projects and weak inflow for ex-Energy segments due to slower-than-expected pick up in private capex may weigh on the near-term performance of SIEM. However, company is well placed to capitalise on expected ramp up in government and private capex over medium to long term. We downgrade our earnings by 3%/4%/5% for FY25/26/27 and revise our valuation multiple downwards from 70x to 65x on twoyear forward earnings to bake in a slower pickup in inflows vs. our earlier expectations. We reiterate our BUY rating on the stock with a revised TP of INR7,500 (vs. INR8,000 earlier).

Addressing opportunities across segments

* Energy – This segment experienced a 30% growth in order inflows at INR88b, buoyed by major order wins to modernize and upgrade gas turbines, EPC substation construction projects, 220 & 400 kV GIS orders for marquee customers, and supply of power transformers. The proposed demerger of the Energy business is slated to be completed in CY25. Management continues to be optimistic on prospects for this segment, with a robust domestic and export opportunity pipeline converging with SIEM’s wide range of offerings.

* Smart Infra – It witnessed healthy demand from grid infrastructure, EV charging, data centers, commercial buildings, steel, cement, oil & gas, et al. translating into order inflow/revenue growth of 12%/19%. The segment is poised to benefit from rapid growth in data centers, EV charging infra, commercial real estate, and industrial investments.

* Digital Industries – FY24 experienced a moderation in order inflow growth, owing to demand normalization of industrial automation products as supply chain snags eased, resulting in shorter delivery cycles. Going forward, growth will be driven by the newer-age verticals such as semiconductors, battery storage, electronics, etc. along with private capex.

* Mobility – Mobility segment recorded a 21% order inflow growth (excluding the 9000 HP order), backed by key orders broadly spread across rail and metro electrification, as locomotive orders were not tendered.

Narrowing the margin differential with Siemens AG

SIEM has managed to improve the localization levels for key components required for STATCOM, HV AIS, circuit breakers, steam turbines and generator spares, gearboxes, traction motor components, and various components for the 9000 HP locomotive order. This resulted in lower dependence on the parent, as exemplified by the declining share of traded goods (refer to Exhibit 7), and also helped SIEM narrow the margin gap with its parent, as depicted in Exhibit 8. Sales made to related parties have been continuously declining as a % of overall sales, indicating lower dependence on the parent and fellow subsidiaries.

Expanding capacity to capture a burgeoning

TAM To harness the growth opportunities in India and export markets and make India a hub for the global Siemens network, SIEM has announced a capex worth ~INR10b in FY24. The capex will be required to expand its facilities in power transformers, metro trains, vacuum interrupters, and GIS over the next 2-3 years. Accordingly, SIEM has seen its capex outgo jump to INR4.5b in FY24 from INR2.5b in FY23.

Following a selective approach in VSC-HVDC tenders

SIEM has expressed its intent to only participate in VSC-based HVDC opportunities, refraining from LCC-based tenders, believing VSC to be the superior technology. In 2021, SIEM commissioned India’s first HVDC project featuring VSC (voltage-sourced converter) technology, connecting Pugalur (Tamil Nadu) to Thrissur (Kerala). Another VSC-based project is currently being executed by Hitachi Energy (Adani Mumbai project). We expect this to limit the addressable market from HVDC projects for the company in the near to medium term

Valuation and recommendation

The stock is currently trading at a P/E of 72x/58x/47x on FY25E/FY26E/FY27E. We cut our estimates by 3%/4%/5% for FY25/26/27 to factor in a slower pick-up in digital industries and mobility segment inflows. We do expect near-term order inflow pick-up to be weak for non-energy segments due to a slower-thanexpected pick-up in private capex. With an anticipated revival in government capex and an increased focus on exports, we expect SIEM to benefit and emerge as a manufacturing hub for its parent company in the export market going forward. We reduce our valuation multiple to 65x from 70x on a two-year forward earnings basis to bake in a slower pick-up in inflows compared to our earlier expectations. We reiterate our BUY rating on the stock with a revised TP of INR7,500 (vs. INR8,000 earlier).

Key risks and concerns

1) Slowdown in order inflows from key government-focused segments such as transmission and railways;

2) aggression in bids to procure large-sized projects would adversely impact margins, and

3) related-party transactions with parent group entities at lower-than-market valuations.

HVDC pipeline shaping up well; SIEM to stick to VSC

Several domestic HVDC projects are on the anvil, as laid out in the revised National Electricity Plan (NEP). However, SIEM has expressed its intent to only participate in VSC-based HVDC opportunities, refraining from LCC-based tenders, believing VSC to be the superior technology. This leaves Hitachi Energy and GE Vernova T&D India in contention for LCC-based tenders

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